Laying the groundwork for further gains

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CINCINNATI (MarketWatch) - In just under two months, the U.S. markets have carved out significant gains.

From bottom to top, the Nasdaq has rallied as much as 12.5%, the Dow has added 7.9% and the S&P 500 has risen 8.0%.

Still, a closer look at the two-month run shows that most of the gains occurred in November. The past three weeks have a surprisingly more range-bound look than might be expected.

The S&P 500's hourly chart above serves as a detailed view of the past three weeks.

After making new highs three weeks ago, the S&P has maintained a stance above its former four-year high of 1,245.

Recall the index found support two weeks ago at 1,249, and bottomed last week at 1,250.

That means for two weeks, the S&P has attracted buyers in the 1,249 to 1,250 area, or just above its former four-year high.

The Dow Industrials remains characteristically weaker than the other indices.

While the Nasdaq and the S&P have closely observed support, the Dow made three-week lows last week.

Nonetheless, the Dow is still positioned above its former seven-month range top around 10,700.

In fact, for three straight sessions, it has bottomed right around 10,730. It touched an intraday low Thursday at 10,729, Friday at 10,729 and Monday at 10,735.

The Nasdaq's near-term view closely mirrors the S&P's.

Recall two weeks ago, the index rallied from support at 2,232, and last week it bottomed at 2,233.

So like the S&P, the Nasdaq has established a two-week range bottom around 2,232, or just above its former four-year high.

Widening the view to the daily time frame adds perspective to the Nasdaq's recent price activity.

After making four-year highs three weeks ago, the index has maintained a stance above the breakout point.

Again, the Nasdaq has established a two-week range bottom at 2,232, or slightly above the August high of 2,219.

The Dow Industrials is the only major index not to make four-year highs, and more recently, has been the only index not to maintain its two-week range.

Still, the index has maintained a posture above support at 10,700, an area that marks a former seven-month range top. Under normal circumstances, the first pullback to this area would draw buyers, and to this point it has.

Again, the Dow has lifted from three straight intraday lows around 10,730.

The S&P 500 made four-year highs in mid-November, and has since sustained the breakout.

Like the Nasdaq, the S&P touched new highs as recently as last week, before retesting support around 1,249.

The bigger picture

In just under two months, the major averages have posted the following sizable gains:

The Dow has run as much as 804 points, or 7.9%.

The S&P 500 has rallied 104 points, or 8.0%.

The Nasdaq has led the rally, running 253 points, or 12.7%.

So at some point, the markets are due to consolidate. Every day can't be an up day.

Still, the point illustrated on the hourly charts above is that the markets already have been range-bound for longer than you might expect.

The sideways price action is especially pronounced on the S&P, which has maintained a tight three-week range of just 23 points, or 1.8%. At the same time, the Nasdaq has established a three-week range of 48 points, or 2.1%.

And while holding their respective ranges, both indices have maintained a stance above former four-year highs. Again, these are the earmarks of a sustainable breakout.

It's also worth reframing recent gains in a much broader context. Using July 2, 2001 as a reference point -- about four and a half years ago -- the S&P 500 at Monday's close was all of 21 points, or 1.7%, higher.

So under one interpretation, the steep November rally doesn't leave the markets extended, so much as it was a necessary element of breaking from a multi-year range.

Put another way, from a technical perspective, chances are good that the recent consolidation doesn't mark the beginning of the rally's end, but instead, marks the end of its beginning.

Both the Nasdaq and the S&P 500 have sustained a break to multi-year highs, and until proven otherwise, the path of least resistance remains higher.

Tuesday's watch list

The charts below identify names worth tracking from a technical perspective. These are intended as radar screen names - sectors or stocks positioned to move near term. For the original comments on the stocks below, check out The Technical Indicator Library.

Company

Symbol

Mon Close

Support

Resistance

Computer Hardware Index

HWI

209.85

204.7

211.7

While the Nasdaq has been range bound for three weeks, the Computer Hardware Index has extended its gains.

That is, after spiking above its major moving averages in mid-November, the group has extended to 10-month highs in December.

From current levels, initial support holds at the July high around 204.7.

The Cyclical Index is designed to measure the strength of economically sensitive industries within the U.S. The idea being, cyclicals have profits most closely tied to the performance of the U.S. economy, making them most sensitive to impending economic shifts.

The two charts above illustrate alternate time frames. The lower chart is a daily view that goes back eight months, while the top chart is a weekly view that goes back 10 years.

On the eight-month view, the Cyclical Index has rallied from a massive double bottom formation that if sustained, could lead to significant further gains. The problem being, the group looks extended after a strong one-year run.

Yet the 10-year view adds perspective to its recent strength. Notice the current run actually started with a massive 2003 rally. The group then sustained its gains with range-bound extensions in 2004 and 2005, making the truly long-term view distinctly bullish.

The implications today? Last Tuesday, the CYC just barely scratched out an all-time high - it topped at 789.95, edging just above the December 2004 high of 789.85. At the same time, the group's relative strength index notched its best reading since December 2003.

So the group is positioned technically to extend its gains. While further near-term consolidation is always possible, the group's longer-term outlook is distinctly bullish.

Note that it rallied through a difficult October behind a sustained volume increase. It then trended from its 50-day as support, before spiking again in December after reporting strong third-quarter results.

From current levels, initial support holds at the November high of $8.80.

Technically speaking, its outlook has improved notably over the past three weeks.

In mid-November, it cleared its 50-day moving average and a four-month downtrend. After consolidating its gains, it extended above its 200-day moving average in early December.

Both rallies have come on strong volume, and its near-term outlook should remain higher barring a close back under its 200-day moving average.

Still well positioned

The table below includes selected names recently profiled in The Technical Indicator that remain well positioned. For the original comments on the stocks below, check out The Technical Indicator Library.

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